JERUSALEM (Reuters) - The Israeli-Palestinian conflict, which once transfixed the Arab world, has lost much of its resonance in a Middle East riven by religious strife, political upheaval and economic woes.

News that the two sides had resumed peace talks last week after a three-year halt was largely overshadowed by turmoil in Egypt and the Syrian civil war, which has set Sunni and Shi'ite Muslims against one another.

U.S. officials still hope that resolving the decades-old confrontation will help to unlock the region's wider problems, but analysts say it no longer lies at the strategic heart of a troubled Middle East.

"That was probably the case before the Arab uprisings, but a number of other struggles have now joined it, such as the Sunni-Shi'ite struggle and an intra-Sunni conflict," said Salman Shaikh, director of the Brookings Doha Center think tank.

"The issue is a sideshow now, but it might take center-stage again if there was genuine progress," he said, underscoring deep skepticism in many quarters about the chances of a deal.

Much has changed in the Middle East since the last talks broke down in 2010. Autocratic leaders in Tunisia, Egypt, Libya and Yemen have been ousted, Islamist radicalism has spread and sectarian warfare between Sunni and Shi'ite Muslims has surged.

More than 100,000 people have died in the Syrian conflict and violence has flared again in Iraq, with over 1,000 killed there in July alone, many at the hands of al Qaeda. Tensions over Iran's disputed nuclear program have also risen, while a struggle for power between Islamists and the military is playing out on the streets of predominantly Sunni Egypt.

Arguably, none of these crises will come any closer to being settled should, by some miracle, Israel and the Palestinians finally agree to divide the land where they live.

LINKAGE

Few people could deny that a resolution of the conflict is long overdue. However, U.S. Secretary of State John Kerry's devotion of so much energy to the issue, which has been drained of much violence in recent years, has raised some eyebrows given the fires raging elsewhere.

To explain American thinking, you only need listen to retired general James Mattis, head of the U.S. military's Central Command until March. Addressing a security forum in Colorado on July 20, he said U.S. interests were being damaged because of the failure to establish an independent Palestine.

"I paid a military security price every day as the commander of Centcom because the Americans were seen as biased in support of Israel," he said, suggesting that this was holding back moderate Arabs from endorsing U.S. policymaking.

Dore Gold, president of the Jerusalem Center for Public Affairs, bristles at such a link. Gold, who used to be a member of Prime Minister Benjamin Netanyahu's policy making circle, argues that Arab rhetoric on the issue belies the reality.

"It is ironic that a Western officer would speak about Israel being a source of political difficulty when, under the table, Arab states are seeking closer ties with Israel because of the shared threat coming from Iran," he said.

Despite Iranian denials, Western experts think Shi'ite Iran is trying to develop nuclear weapons. This alarms many Sunni Arab leaders as much as the Israelis.

A review of thousands of U.S. classified documents posted on the WikiLeaks website suggests that in private, Sunni officials were indeed more interested in discussing Iran and other topics than the fate of the occupied Palestinian Territories.

FRUSTRATIONS

In public, Muslim leaders have traditionally railed against Israel, happy to fan ordinary Arabs' sincere anger about the plight of the Palestinians - and perhaps deflect criticism of their own failure to make badly needed reforms.

Arab leaders can no longer get away with this. The uprisings of the last 2-1/2 years have shown that domestic problems cannot be swept under the carpet. These include a deep economic malaise that a peace deal would do nothing to heal.

According to an International Monetary Fund report from 2012, unemployment in the Middle East and north Africa was the highest in the world. It put the jobless rate amongst youths at about 25 percent, again the worst regional level in the world.

The survey criticized rigid labor laws, overbearing central government and a lack of economic competitiveness, factors in the frustrations that drove the Arab uprisings.

In a 2011 newspaper interview, President Bashar al-Assad said Syria was immune to unrest partly because he had united it in common cause against Israel. It was a hollow claim; just weeks later, violence erupted among Syrians that still rages.

Assad's Lebanese Shi'ite ally, the militant group Hezbollah, is now fighting by his side against the Sunni rebels, wrecking the respect it had won in Sunni circles for its uncompromising confrontation with Israel over more than two decades.

Aware of its battered reputation and the fact that the Arab world is not focused on Israel, Hezbollah leader Sayyed Hassan Nasrallah wrapped himself in the cloak of Palestinian resistance on Friday, issuing a rallying cry for fellow Muslims.

"The elimination of Israel is not only a Palestinian interest. It is the interest of the entire Muslim world and the entire Arab world," he said in a rare appearance in Beirut.

Such thinking suggests that even if the Palestinian leadership does get its wish to create a state on land seized in the 1967 war, this will not satisfy die-hard militants who reject Israel's very right to exist.

CONSPIRACIES

A deal would also not end all anti-Western sentiment in the region. True, it would empty one important reservoir of poison from the relationship, but suspicions of U.S. and European dealings go much deeper than simply their close ties to Israel.

This was laid bare by a 2011 survey conducted in Muslim nations by PewResearch, which showed that a median of 53 percent thought that U.S. and Western policies were one of the top two reasons why Islamic nations were not wealthier.

Likewise, the median saying Westerners were selfish, violent, immoral and arrogant exceeded 50 percent, while there was no Muslim nation in which even 30 percent could accept that Arabs conducted the 9/11 attacks on U.S. cities in 2001.

"The notion of conspiracy is deeply entrenched in the Middle East and we are a central piece of it," said Aaron David Miller, a former U.S. State Department adviser on the peace process, now at the Woodrow Wilson Center in Washington.

"Nothing in the Middle East that happens that is bad goes unattributed, and a lot of it is placed on us."

While scoffing at the idea that a peace deal could be a panacea for the region's ills, Miller said it would help to protect Israel's diplomatic ties with Egypt and Jordan, where popular anger at the treatment of the Palestinians is deep.

Underlining the importance Washington puts in Jordan's stability, Kerry announced the resumption of the peace talks in its capital, Amman. Egypt, however, has much more to worry about now than the predicament of the Palestinians.

Last year crowds in Cairo's Tahrir Square, celebrating the election of the Islamist Mohamed Mursi as president, chanted: "in millions we shall march to Jerusalem". Today, the square is filled with supporters of the army which ousted Mursi last month.

These Egyptians are preoccupied with their own problems. "Of course a peace agreement would be a blessing from Allah to us and all Arabs, but first we must rid ourselves of the dictators and tyrants who steal from us and bend to the West," said Faris Ismael, the owner of a bakery in downtown Cairo.

(Additional reporting by Tom Finn in Cairo and Phil Stewart in Washington; editing by David Stamp)